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Market Sectors Under a Trump Presidency

The surprise election of Donald Trump as US President last week has been felt in the markets in a variety of ways. Equities have come up, while the bond market has been crushed. The US dollar has strengthened, while Asian currencies and the Mexican peso have declined in value. Finance stocks have cruised, while tech has suffered. While many of these moves are palpable for investors today, analysts caution against using post-election market activity as any kind of predictor for the future (history tells us that it is not reliable). So let’s not do that. Instead, let’s round up what experts are saying about how the anticipated policies of a Trump Administration could affect different sectors of the stock market.

We’ve pulled together a variety of sources to shed some light on what kinds of policies we could reasonably expect from the new administration, and how those policies might affect different sectors.

Finance

The financial sector is widely expected to be one of the winners. US-based banks have led the sector since the election, as seen in the following chart. US banks, in blue, are compared with the financial sector, in orange, since November 9:

One reason for this is that Trump is expected to loosen regulations on banks, such as by repealing or at least defanging Dodd-Frank, a complex piece of legislation aimed at protecting consumers and mitigating the overall risk of the financial industry. Rolling back Dodd-Frank would decrease the cost of regulatory compliance. It’s not clear if the Volcker Rule is on the chopping block, but if it goes, banks would be able to make speculative investments that do not benefit their customers. That could lead to higher profits for the banks, but could also result in the type of unstable situation that the rule was designed to prevent.

Furthermore, Moody’s warns: “While a reduction in regulatory compliance costs would bolster bank earnings, reduced oversight and a roll-back of requirements would also result in a weakening a of banks’ capital and liquidity positions, a negative from a credit perspective.”

On top of the possibility of decreased regulation in the financial industry, the Fed is widely expected to raise the federal funds rate this December. Higher interest rates reverberate throughout the economy in complex ways; one way is that banks increase the spread on what they pay out to savers versus what they earn from borrowers, meaning they increase their profit margin. For more information on how raising the federal funds rate can affect investors, see our Notes on an Interest Rates Rise.

Industrials

This one is pretty straightforward. Trump’s promise of increased infrastructure spending makes industrials stocks attractive, especially stocks related to construction. The plan he released in October says the $1 trillion in infrastructure projects would be financed without raising taxes and the projects themselves would be required to generate cash flow. The extent to which he would be able to pull this off is unclear, but there is a good chance that some major investments in infrastructure will be made. Defense stocks are also up on Trump’s calls to increase defense spending.

Basic Materials

Less has been made of what will happen in basic materials, but like industrials, this sector would likely benefit from increased infrastructure spending.

Healthcare

Although healthcare stocks were mostly up following Trump’s win, the prognosis for this sector, or for certain industries within, is murky. Following the surprise election outcome, investors bought up biotech and pharmaceutical stocks on the expectation that Trump would be hands-off (relative to Clinton, who was expected to crack down on high drug pricing). Health insurance stocks went down, based on Trump’s calls to repeal the Affordable Care Act (Obamacare). Yet details about what the administration will really do with regard to healthcare are slim. With the support of a Republican-controlled Congress, the ACA is sure to get a haircut, but a full repeal of the law is unlikely.

Energy

Although it is not clear exactly what Trump will do with regard to energy and environmental policy, much of the energy sector could profit off of what will likely be looser regulations. By selecting a climate change skeptic to head his EPA transition team, in addition to his own comments about the environment, Trump has signaled that he will probably roll back environmental regulations and may back out of the international Paris climate agreement signed earlier this year.

Trump favors traditional energy sources such as oil, gas, and coal. Meanwhile, renewables such as solar could be hurt in this new environment, and indeed solar stocks have dropped since the election. At the same time, solar is a firmly established and growing industry that could still find a way to thrive under a fossil fuel-oriented president.

Technology

Tech stocks took a dive after the election, based on fears around Trump’s anti-immigration and isolationist trade outlook, as well as bad blood between the President-Elect and many Silicon Valley leaders. The tech sector relies on cheap overseas manufacturing as well as skilled immigrant labor (computer programmers, to be specific). Thus any new anti-trade and anti-immigration policies could indeed be harmful to the tech sector. However, the extent to which Trump would actually try to crack down, or be able to crack down, on trade and immigration is not clear, as they are complex issues, and he has already softened his tone on these matters. Additionally, some of his proposed policies could be favorable to tech companies, such as the ability to repatriate cash at a lower rate.

Consumer Cyclical (Discretionary)

As long as the economy continues to strengthen and grow, consumer cyclicals will produce winners. An interest rate rise would add friction for this sector, but then again, the federal funds rate will only be increased once the Fed determines that the economy is resilient enough to handle it, so the total effect could be minimal. The Trump policies that could impact the tech sector could have similar effects in consumer cyclical, although this sector is home to a more diverse set of industries with varying exposure to both international trade and immigration related matters.

Goldman Sachs, for one, is feeling bullish: “Looking forward, cyclicals outperformance should persist,” a note to clients read. “Tax and trade reform appear to be high priorities for President elect Trump. Cyclical stocks that should benefit most will have high domestic sales, sizeable profits held overseas that may be repatriated, and/or high corporate tax rates.”

Real Estate, Utilities, and Consumer Defensive

Real estate, utilities, and consumer defensive may have a tougher go of it. Few specific policy proposals of Trump’s have been called out with regard to these sectors; instead the macroeconomic climate is most important. With bond yields rising and an expected increase to the federal funds rate, these traditional “yielding” sectors could be hurt if income-oriented investors opt for low-risk bonds over equities. To compete with higher bond yields, REITs can increase yields as well, but at the expense of share price. The housing industry could be dinged by increasing interest rates, as higher mortgage rates will translate to fewer new homeowners.

Communication Services (Telecom)

The smallest sector could be jolted by some of Trump’s proposed policies. Trump and the Republican-controlled Congress could dismantle net neutrality and consumer privacy regulations, which would favor large media conglomerates and could disadvantage smaller firms.

It is also worth noting that Trump has vowed to disrupt big media mergers such as AT&T and Time Warner.

Summary

As you can see, there are many open questions about precisely what kinds of policies the new administration will seek to enact. As Trump’s policies take shape, investors will be able to form a clearer picture of who will be the winners and losers in the years to come. In the meantime, if you’re a long-term investor, don’t let the current market exuberance (or pessimism, in some cases) cloud your research-based decision making.